Dear Dairy, the ACCC recommended a mandatory code …

An end to $1 supermarket milk to help dairy farmers? ACCC’s Final Report on its dairy inquiry says no but recommends a mandatory code to improve the bargaining power of farmers.

Following the media attention and concerns of farmers surrounding $1 private label milk offered by major supermarkets, a question on many people’s minds has been:

Would requiring the major supermarkets to increase the price of milk improve the plight of dairy farmers?

It appears that the answer is a resounding “no”, based on the ACCC’s Final Report for its Inquiry into the dairy industry (read our previous post on the inquiry here).

The ACCC found that there are significant imbalances in bargaining power at each level of the dairy supply chain, pointing to:

the lack of bargaining power of farmers relative to processors; and

the poor bargaining power of processors against the supermarkets.

The ACCC ultimately concluded that increased margins from higher milk prices would ultimately be captured by supermarkets (and at best, shared between supermarkets and processors), but were unlikely to be passed down the chain to farmers.

Accordingly, the ACCC has recommended, amongst other measures, a mandatory code to address the shortcomings of the current framework (which presently includes a voluntary code) in addressing the structural issues inherent in the industry.

Issues in the dairy industry

The ACCC identified the following key issues in the course of its inquiry:

Structural imbalance in bargaining power between farmers and processors, caused by factors including:

the shelf-life and generic nature of raw milk, coupled with the large number of farmers relative to processers, means that farmers are rarely able to negotiate contracts or prices with processors; and

the information asymmetries in the availability of pricing, market and product information in farmer-processor relationships.

Neither the Voluntary Dairy Code, nor collective bargaining, were considered by the ACCC to be broad remedies to the issues arising from the bargaining power imbalances.

Raw milk contractual arrangements are more favourable to processors – for example, complex contracts limit the ability of farmers to switch processors and result in a lack of milk price transparency and uneven allocation of risk.

The ACCC also considered that some terms may be unfair, finding that “contract termination notice periods and automatic contract rollover clauses are problematic in most circumstances”. The ACCC is considering potential issues under the unfair contract terms legislation.

Recommendations

In light of these findings , the Final Report contains the following recommendations:

Mandatory code

A mandatory code of conduct within the Competition and Consumer Act 2010 should be established.

The mandatory code should be designed to improve transparency and certainty in contracts.

The mandatory code is likely to contain obligations on processors to improve the timing and manner of communication of price and key information to farmers.

The ACCC will enforce the mandatory code.

The industry should establish a process whereby an independent body can mediate and arbitrate contractual disputes between farmers and processors.

Price transparency and certainty of terms and conditions for milk supply

Processors and farmers should acknowledge in writing the terms and conditions for milk supply, including any contract variations. This is aimed at improving clarity and transparency of the arrangements.

Processors should simplify their contracts where possible, including by minimising the number of documents and clearly indicating which documents contain terms and conditions of milk supply.

Processors should publish information on how their pricing offers apply to individual farm production characteristics to enable better farm income forecasts. This is aimed at improving the transparency of pricing by allowing farmers to make better comparisons of processors’ supply terms.

Farmers should ensure they have properly considered the legal and financial implications of their contracts.

Encouraging switching by farmers

Processors should provide all contractual documents simultaneously before the commencement of the dairy season or contract term. This is aimed at providing farmers with more information before they commit to supply a particular processor.

Milk supply contracts should not include terms which unreasonably restrict farmers from switching between processors e.g. loyalty bonuses or other payments paid in respect of one dairy season but require ongoing supply into a new dairy season.

The government has not yet provided an official response to the ACCC’s report and recommendations. It is ultimately the government’s decision whether a mandatory code will be implemented and the content of such a code. It will be interesting to see how these measures take shape and affect the bargaining power of market players.